Performance management is one of the hottest topics among senior finance executives and the analysts and vendors who serve them. Simply put, it’s a set of processes, metrics, methodologies, and software tools that allow an organization to forecast, measure, and react to various business drivers and performance indicators — all in the service of its overall business strategy.
Performance management software systems — like individual scorecards, reports, forecasts, or key performance indicators — are only one component of a performance management initiative. But successful implementation of a performance management software system is critical to the success of the initiative as a whole. These sophisticated tools, when designed and implemented correctly, are the glue that holds a performance management initiative together — providing the tight integration between performance management components that many senior executives we interviewed say is necessary for success.
We launched a research program in September 2005 to investigate the next piece of the story: How can companies that are implementing performance management systems make them work to best advantage? Through a series of interviews with senior finance executives, we gathered advice on how to successfully manage implementation projects, focusing in particular on staffing the implementation team, designing performance management systems to reflect company strategy, and managing change within the organization.
This report represents the findings of our in-depth interviews with senior finance executives at the following companies:
• Agilent Technologies
• Eastern Mountain Sports
• Erickson Retirement Communities
• Heineken U.S.A.
• Jane Goodall Institute
• Jim Beam Brands
• Neal & Massy Holdings Ltd.
• Russell Corp.
• Sodexho U.S.A.
• WellCare Health Plans, Inc.
Building Business Strategy into Performance Management
The executives we interviewed say the right leadership helped their companies get buy-in and group consensus on the performance management project. But equally important is deep business expertise and operations experience among implementation team members. Such expertise and experience, say executives, help companies design systems that measure the right financial and operational activities. By doing so, companies equip their planning and operating staff to budget and forecast more effectively, and to execute activities in alignment with business strategy.
Performance management tools certainly can help companies craft their business strategies more easily and with greater confidence — freeing them from worrying about data gathering and data integrity, and giving planners from diverse areas of the business more room to apply their analytic know-how. Don Rodgers, corporate controller at Jim Beam Brands, says: “Preparing our strategic plan used to be a very long and cumbersome process. Now marketing is working on strategic plans for branding, our salespeople are working on their strategic plan, and also finance people are working on theirs. We just pull the three together in the system and then we can discuss the differences. The beauty of our tool is that it gives us data integrity — the numbers are current, and everyone is working from the same ones.”
But performance management systems not only help companies develop strategies; they help companies translate them into action. So what goes into building a performance management system that fits the business, furthers a larger performance management initiative, and responds to real — and constantly evolving — business needs? The answer, of course, varies from company to company. The executives we interviewed converged, however, on several main areas of focus: determining the critical metrics and performance indicators that the system will measure; setting appropriate parameters for forward-looking, what-if scenario analyses; configuring system access to further the company’s objectives; and anticipating future business developments in system design.
Incorporating Critical Metrics and Performance Indicators
For many companies, determining the financial and operating metrics and key performance indicators that are crucial to business decision making is the logical first step in designing an effective performance management system. The system, in other words, has to measure the right things if decision makers are to execute broad objectives and respond quickly to changing conditions. Many companies constitute working groups to identify metrics and indicators prior to implementing — or even selecting — a performance management software suite. While companies employ a variety of methodologies to select metrics and key performance indicators, their approaches have something in common: the metrics and indicators that emerge from this process, say executives, should be closely tailored to managers’ decision making needs.
At the Jane Goodall Institute, strategy execution is closely linked to the company’s annual operating plan, says CFO Robert Menzi. “Strategy is a long-term view of how the company will grow over time, and what we plan to do to accomplish our goals. The annual operating plan is the near-term manifestation of that strategy. Performance management software allows you to quantify how well your strategy is doing by allowing you to track actual performance against the plan; that’s what it’s all about.” And part of this process, he notes, is defining which metrics the company will measure.
Medicare/Medicaid HMO WellCare carefully selects and monitors leading indicators to allow the company to look forward and then respond quickly to changing conditions. In the health care business, an important leading indicator is “inpatient authorization days,” says director of financial planning and analysis Bob Trinh. “Inpatient hospital stays are the most expensive setting of care in the health care system,” he explains. “The usual procedure is that a primary care physician will call the HMO to secure prior authorization for a member’s hospital stay. Once these authorization days are approved, our health services department records them, so [we in the medical economics group] will know how many authorization days the company has approved.”
“But even though the days have been authorized,” Trinh continues, “the patient may not yet be in the hospital — so tracking this metric gives us a leading indicator. If there were a spike in authorizations, we would know that it could seriously affect our medical expenses.” Performance management tools, he adds, can give companies a view into performance through these types of leading indicators before actual performance is reflected in financial statements: “Without these tools, the company might not know about the spike until months later, when it’s too late to react.”
This more timely view into performance, Trinh notes, would give companies the opportunity to make adjustments to their operations. And because performance management tools report metrics and leading indicators in a format that lends itself to sophisticated analytical techniques, they can help managers make better-informed decisions faster. Trinh notes that a performance management tool would allow a health care company not only to identify sudden spikes or dips in its leading indicators, but also to investigate the source of the fluctuations. “It would allow people to drill down and determine the cause of the abnormality,” he says. “Was [there a spike in inpatient authorization days] because this particular month is high flu season?” Performance management tools also allow comparisons to be made between months, years, or seasons, he explains, which would help the company understand and analyze fluctuations in its leading indicators and make necessary adjustments.
The metrics that performance management systems are designed to track should measure company strategy — but, more importantly, they should also help companies to execute strategy. James Robertson, director of planning and performance management at Internet security company VeriSign, is heading an initiative to implement performance management tools that will allow the company to measure key financial and operating measures and set performance targets. A timely and comprehensive view into these measurements of performance, Robertson explains, can help companies advance broader strategic objectives by revealing areas of potential competitive weakness or advantage. Based on this view, management can then set targets that are in line with strategic priorities: “We won’t just be measuring performance through the system; we’ll be setting targets. For example, depending on the strategic direction a company has taken, customer satisfaction may be a top priority. The system would allow you to link people’s behavior to strategy by setting customer satisfaction targets, identifying initiatives designed to accomplish these targets, and tracking the impact of initiatives on customer satisfaction and strategic objectives.”
Setting Appropriate Parameters
One of the main reasons outdoor equipment retailer Eastern Mountain Sports implemented a performance management software suite was to gain access to powerful analytic tools that would allow finance to conduct forward-looking, what-if analysis, says financial planning manager Rita Siegel. “As a retailer, we do frequent forecasting,” Siegel says. “Of course, we always have our budget, but we also do three-year long-range plans. So we’ve been designing a system that will allow us to start with where we are today and create reports on multiple scenarios. With this, we’ll be able to see, based on where we are today and based on the parameters that we build into the system, what we might look like in two or three years. To have done that prior to going to the performance management system would’ve been very, very labor-intensive. But when our system is up and running, it should only take minutes.”
Identifying the right parameters, Siegel notes, leads to more accurate scenarios and better decision making. The key to choosing the right parameters is understanding the market forces, industry dynamics, and cost fluctuations that have the most impact on the business: “We’re in the retail business, so one important parameter is the number of store locations,” she says. “Another is sales growth or decline — ‘What if our sales grew by a certain percentage?’ We can also pick and choose which expenses that we want to have grow, stay flat, or decrease, so we have to understand our cost structure — which expenses are fixed and which are tied to other expenses as we grow the top line. In the retail business, if your sales line grows, your costs will probably grow, too — maybe not at the same rate, but they will grow.
For example, we deal with credit card fees, so as our sales grow, certain credit card expenses grow with them. You have to understand the type of business that you’re in when you design one of these what-if scenarios for your company — you need to know how you’ll want to be able to pick and choose what will drive the scenario.”